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SUPERCONDUCTOR TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) General
We are a leading company in developing and commercializing high temperature
superconductor ("HTS") materials and related technologies. Superconductivity is
the unique ability to conduct various signals or energy (e.g., electrical
current or radio frequency ("RF") signals) with little or no resistance when
cooled to "critical" temperatures. HTS materials are a family of elements that
demonstrate superconducting properties at temperatures significantly warmer than
previous superconducting materials. Electric currents that flow through
conventional conductors encounter resistance that requires power to overcome and
generates heat. HTS materials can substantially improve the performance
characteristics of electrical systems, reducing power loss, lowering heat
generation, and decreasing electrical noise.
Commercialization
Our development efforts over the last 25 years have yielded an extensive patent
portfolio as well as critical trade secrets, unpatented technology and
proprietary knowledge. We have commercialized wireless products using our
proprietary technology and are currently focusing our efforts on commercializing
this technology in superconducting power applications, RF filters and
cryocoolers.
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• Wireless Networks. Our current commercial products help maximize the
performance of wireless telecommunications networks by improving the
quality of uplink signals from mobile wireless devices. Our products
increase capacity utilization, lower dropped and blocked calls, extend
coverage, and enable higher wireless data throughput - all while reducing
capital and operating costs for the carrier.
• Superconducting Power Applications. We are adapting our unique HTS
materials deposition techniques to deliver energy efficient,
cost-effective and high performance 2G HTS wire technology for next generation power applications. We have identified several large initial
target markets for our 2G HTS wire including energy (wind turbines, smart
grid) and industrial (motors, generators) applications. To accelerate
development and manufacturing processes for our 2G HTS wire, we are
partnering with HTS industry leaders and the United States National Labs.
In July 2011, we renewed our three year Cooperative Research and
Development Agreement with Los Alamos National Laboratory. These
technological interchanges will help us meet the technical challenges and
performance metrics for both high performance and cost effective 2G HTS
wire.
• RF Filters. Our RF filter structures resemble a circuit on a semiconductor
using a circuit that is etched into HTS materials that are deposited on a
wafer. Our unique and innovative circuits allow us to utilize the
characteristics of the HTS materials for this application, and we have
developed unique tuning methods that allow us to produce a frequency
specific filter. We are also leveraging our unique technology to design
advanced reconfigurable filters, which have the potential to drastically
reduce the size and cost of mobile devices.
• Cryocoolers. We developed a unique cryocooler that can efficiently and
reliably cool HTS circuits to the critical temperature (77 degrees
Kelvin), and as a result, our wireless products are maintenance free and
reliable enough to be deployed for many years.
Our development efforts can take a significant number of years to commercialize,
and we must overcome significant technical barriers and deal with other
significant risks.
Our Wireless Business
Our current revenue comes from the design, manufacture, and sale of high
performance infrastructure products for wireless communication applications. We
have three current product lines all of which relate to wireless base stations:
• SuperLink®, a highly compact and reliable receiver front-end HTS
wireless filter system to eliminate out-of-band interference for
wireless base stations, combining filters with a proprietary cryogenic
cooler and a cooled low-noise amplifier;
• AmpLink®, a ground-mounted unit for wireless base stations that
includes a high-performance amplifier and up to nine dual duplexers;
and
• SuperPlex, a high-performance multiplexer that provides extremely low
insertion loss and excellent cross-band isolation designed to
eliminate the need for additional base station antennas and reduce
infrastructure costs.
We sell most of our current commercial products to a small number of wireless
carriers in the United States, including AT&T and Verizon Wireless. Verizon
Wireless and AT&T each accounted for more than 10% of our commercial revenues in
each of the last three years. Demand for wireless communications equipment
fluctuates dramatically and unpredictably and recently has been trending
downward. The wireless communications infrastructure equipment market is
extremely competitive and is characterized by rapid technological change, new
product development, product obsolescence, evolving industry standards and price
erosion over the life of a product. We expect these trends to continue and they
may cause significant fluctuations in our quarterly and annual revenues.
Our Strategic Initiatives
In addition to our ongoing sale of products for wireless applications described
above, we have created several unique capabilities and an HTS manufacturing
system related to a new HTS wire platform, RF filters and cryocoolers that we
are seeking to commercially deploy by leveraging our leadership in
superconducting technologies, extensive intellectual property, and HTS
manufacturing expertise.
HTS Wire Platform
Our 2G HTS wire product development is focused on large markets where the
advantages of HTS wire are recognized by the industry. Our initial product
roadmap targets three important applications: superconducting high power
transmission cable, superconducting fault current limiters (SFCL) and
superconducting rotating machines such as motors and generators.
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Superconducting High Power Transmission Cable:
Superconducting high power transmission and distribution cable transmit 5 to 10
times the electrical current of traditional copper or aluminum cables with
significantly improved efficiency. HTS power cable systems consist of the cable,
which is comprised of hundreds of strands of HTS wire wrapped around a copper
core, and the cryogenic cooling system to maintain proper operating conditions.
HTS superconducting cables offer solutions for utilities facing challenges that
include: substation footprint availability, lack of available rights of way, and
high load connections between substations. HTS power cables are particularly
suited to high load areas such as the dense urban business districts of large
cities, where purchases of easements and construction costs for traditional low
capacity cables may be cost prohibitive.
Superconducting Fault Current Limiter (SFCL):
With power demand on the rise and new power generation sources being added, the
grid has become overcrowded and vulnerable to catastrophic faults. Faults are
abnormal flows of electrical current like a short circuit. As the grid is
stressed, faults and power blackouts increase in frequency and severity. SFCLs
act like powerful surge protectors, preventing harmful faults from taking down
substation equipment by reducing the fault current to a safer level (20 - 50%
reduction) so that the existing switchgear can still protect the grid. SFCLs
protect against damaging fault currents and blackouts while enhancing system
safety, stability, and efficiency. A critical benefit for new build outs is the
improved system reliability when renewables, like solar and wind, are added.
When compared to a complete substation upgrade, SFCLs are a significantly lower
capital investment.
Superconducting Rotating Machines - Motors and Generators:
Superconducting motors, generators, turbines and other rotating machines are
expected to generate large future demand for 2G HTS wire. Coils utilizing HTS
wire will enable electric motors and generators to operate at much higher power
densities. When compared to a copper wire based electric machine with equivalent
output power, future superconducting motors and generators will enable
significant size reductions for the motors with higher efficiency. One potential
application for high-powered HTS generators is expected to be 10+ megawatt
offshore wind turbines. Offshore superconducting wind turbines promise to
capture clean energy at a lower cost than competing renewables, while delivering
power directly to growing coastal cities. Offshore superconducting wind turbines
are a long-term initiative for HTS technologies. Wind energy is taking shape as
a critical world resource for electric power. Today, wind energy is primarily
land based. The expected future trend is to exploit a largely untapped supply of
offshore wind energy. However, it will take time to build enough infrastructure
for offshore wind power to significantly contribute to the power grid.
Superconducting wind turbines are expected to play a unique role offshore since
conventional technology cannot achieve the necessary "power per tower". The
increase in power density provided by superconducting turbines significantly
reduces generator weight and maximizes power per tower, turning wind power into
an economically viable alternative. Size reduction translates directly to cost
savings by greatly reducing the amount of magnetic steel and structural steel
required. Superior 2G HTS wire power handling performance at a lower cost will
enable superconducting wire to replace incumbent and competing technologies.
RF Filters
Conventional RF filters are fabricated primarily from aluminum blocks with
hollow cavities, resonators, and tuning elements incorporated to make a
frequency specific filter. Our filter structures resemble a circuit on a
semiconductor using a circuit that is etched into HTS materials that are
deposited on a wafer. Our unique and innovative circuits allow us to utilize the
characteristics of the HTS materials for this application. We have also
developed unique tuning methods that allow us to produce a frequency specific
filter.
In July 2012 we contributed 14 patents and patents pending regarding our
innovative Reconfigurable Resonance™ (RcR) technology, experienced executive
leadership and technical expertise as our minority investment in Resonant
LLC. The net value of the assets contributed was $423,000, which is included in
Other assets for the period ending September 29, 2012. We have accounted for
this transaction using the equity method and the results for the period ending
September 29, 2012 were not material. Resonant intends to commercialize RcR for
the mobile communication products industry. The contributed patents do not
relate to either our current wireless business nor to our 2G HTS wire
initiative.
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Cryocoolers
HTS circuits need to be cooled to the critical temperature that enables the
superconducting properties of the materials to be utilized. To meet this need,
we developed a unique cryocooler that can efficiently and reliably cool the
circuit to the critical temperature (77 degrees Kelvin). As a result, our
wireless products are maintenance free and reliable enough to be deployed for
many years.
Results of Operations
Quarter and nine months ended September 29, 2012 compared to the quarter and
nine months ended October 1, 2011
Net revenues increased by $852,000 or 178%, to $1,331,000 in the third quarter
of 2012 from $479,000 in the third quarter of 2011. Total net revenues decreased
by $889,000, or 28%, to $2.3 million in the first nine months of 2012 from $3.2
million in the same period of 2011. Net revenues consist primarily of commercial
product revenues and government contract revenues.
Net commercial product revenues increased by $831,000, or 177%, to $1.3 million
in the third quarter of 2012 from $470,000 in the third quarter of 2011. The
increase is the result of higher sales volume for our SuperLink products. For
the first nine months of 2012, net commercial revenue decreased to $2.2 million
from $3.2 million in the same period of 2011, a decrease of $1.0 million, or
32%. The decrease in the nine month period was the result of lower sales of both
our SuperLink and AmpLink products in the first six months of 2012. We sell our
SuperLink and other performance enhancement products to large North American
wireless operators. As our customers continue to invest in 4G networks, spending
on 3G data networks, where our products are deployed, has become a secondary
priority. This market dynamic has impacted and we believe will continue to
impact our commercial revenue. The average sales prices for our products were
unchanged. Our three largest customers accounted for 93% of our total net
commercial product revenues in the first nine months of 2012 and 99% in the same
period of 2011. These customers generally purchase products through non-binding
commitments with minimal lead-times. We also continue to experience challenges
to revenue growth in the commercial wireless market. Consequently, our
commercial product revenues can fluctuate dramatically from quarter to quarter
based on changes in our customers' capital spending patterns, and revenues may
continue to be impacted by such challenges.
Government contract and other revenues increased by $21,000 from $9,000 in the
third quarter of 2011 to $30,000 in the third quarter of 2012. For the first
nine months of 2012, government contract revenues increased to $152,000 from
$41,000, an increase of $111,000, or 271%. This increase is attributable to the
addition of two small government contracts procured in early 2012.
Cost of commercial product revenues includes all direct costs, manufacturing
overhead and provision for excess and obsolete inventories. The cost of
commercial product revenues decreased to $1.0 million in the third quarter of
2012 compared to $1.1 million for the third quarter of 2011, a decrease of
$72,000 or 7%. For the first nine months of 2012, the cost of commercial product
revenues totaled $2.9 million compared with $4.0 million for the first nine
months of 2011, a decrease of $1.1 million, or 27%. The lower costs resulted
principally from lower production as a result of lower sales. We had an expense
provision for obsolete inventories in the first nine months of 2012 of $270,000
compared to no expense provision in the first nine months of 2011.
Our cost of commercial sales includes both variable and fixed cost components.
The variable component consists primarily of materials, assembly and test labor,
overhead, which includes equipment and facility depreciation, transportation
costs and warranty costs. The fixed component includes test equipment and
facility depreciation, purchasing and procurement expenses and quality assurance
costs. Given the fixed nature of such costs, the absorption of our production
overhead costs into inventory decreases and the amount of production overhead
variances expensed to cost of sales increases as production volumes decline
since we have fewer units against which to absorb our overhead costs.
Conversely, the absorption of our production overhead costs into inventory
increases and the amount of production overhead variances expensed to cost of
sales decreases as production volumes increase since we have more units against
which to absorb our overhead costs. As a result, our gross profit margins
generally decrease as revenue and production volumes decline due to lower sales
volume and higher amounts of production overhead variances expensed to cost of
sales; and our gross profit margins generally increase as our revenue and
production volumes increase due to higher sales volume and lower amounts of
production overhead variances expensed to cost of sales.
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The following is an analysis of our commercial product gross income (loss):
Dollars in thousands Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
2012 2011 2012 2011
Net commercial product sales $ 1,301 100 % $ 470
100 % $ 2,174 100 % $ 3,174 100 %
Cost of commercial product sales 1,021 78 % 1,093
233 % 2,943 135 % 4,027 127 %
Gross profit $ 280 22 % $ (623 ) (133 )% $ (769 ) (35 )% $ (853 ) (27 )%
We had a gross profit of $280,000 in the third quarter of 2012 from the sale of
our commercial products compared to a gross loss of $623,000 in the third
quarter of 2011. We experienced a gross profit in the third quarter of 2012
versus a gross loss in the third quarter of 2011 primarily because the higher
level of commercial sales in the current third quarter was sufficient to cover
our fixed manufacturing overhead costs. We regularly review inventory quantities
on hand and provide an allowance for excess and obsolete inventory based on
numerous factors including sales backlog, historical inventory usage, forecasted
product demand and production requirements for the next twelve months. Gross
margin in the third quarters and first nine months of 2012 and 2011 was not
impacted by the sale of previously written-off inventory.
Cost of government and other contract revenues totaled $18,000 in the third
quarter of 2012 compared to $9,000 in the third quarter of 2011 and $113,000 in
the first nine months of 2012 compared to $39,000 in the first nine months of
2011. This increase was the result of higher expenses associated with more
revenue from government contracts. Because these contracts are generally priced
on a "cost plus" basis, increases in revenue generally result in increases in
associated costs. As a percentage of government and other contract revenues,
these costs decreased to 74% in the first nine months of 2012 compared to 95% in
the first nine months of 2011 because of the cost plus nature of the contracts.
Research and development expenses relate principally to development of our HTS
wire products and other products related to our expertise. These expenses
totaled $1.3 million and $3.8 million, respectively, in the three and nine
months ended September 29, 2012 compared to $1.1 million and $4.4 million in the
three and nine month period ended October 1, 2011. These expenses were $0.8
million higher in the prior nine month period when we voluntarily terminated a
patent license we had with a third party along with certain other related
intangible assets. As a result, capitalized cost was charged to expense during
the nine months ended October 1, 2011.
Selling, general and administrative expenses totaled $1.2 million and $4.2
million, respectively, in the three and nine months ended September 29, 2012
compared to $1.7 million and $5.0 million in the three and nine months ended
October 1, 2011. The reduction was primarily from lower sales expenses.
Interest income for the three and nine months ended September 29, 2012 was
$1,000 and $6,000 respectively compared to $16,000 and $20,000, respectively, in
the three and nine months ended October 1, 2011. The decreases resulted from
lower cash levels in the 2012 periods.
There was no interest expense for the three and nine months ended September 29,
2012. Interest expense for the three and nine months ended October 1, 2011 was a
credit of $1,000 and $13,000, respectively, and was the result of our line of
credit with a bank. We had not used the line of credit in a number of years and
allowed it to expire in 2011.
We had a net loss of $2.3 million for the quarter ended September 29, 2012,
compared to a net loss of $3.3 million in the same period of 2011. For the nine
months ended September 29, 2012 our loss totaled $8.7 million compared to a net
loss of $10.3 million for the nine months ended October 1, 2011.
The net loss available to common stockholders totaled $0.06 per common share in
the third quarter of 2012, compared to a net loss of $0.10 per common share in
the same period of 2011. The net loss available to common stockholders totaled
$0.23 per common share in the first nine months of 2012 compared to $0.33 per
common share in the first nine months of 2011.
Liquidity and Capital Resources
Cash Flow Analysis
As of September 29, 2012, we had working capital of $3.1 million, including $2.5
million in cash and cash equivalents, compared to working capital of $7.2
million at December 31, 2011, which included $6.2 million in cash and cash
equivalents. We currently invest our excess cash in short-term,
investment-grade, money-market instruments with maturities of three months or
less.
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Cash and cash equivalents decreased by $3.7 million from $6.2 million at
December 31, 2011 to $2.5 million at September 29, 2012. Cash was provided by
financing activities offset by uses in operations and by purchases of property
and equipment.
Cash used in operations totaled $7.4 million in the first nine months of 2012.
We used $7.3 million to fund the cash portion of our net loss. We also used cash
to fund a $1.0 million increase in accounts receivable, prepaid expenses and
patents, offset by cash provided by a $0.9 million decrease in inventory and
other assets, as well as an increase in accounts payable and accrued expenses.
Net cash used in investing activities totaled $2.8 million in the first nine
months of 2012. Purchases of equipment for our HTS wire initiative were $2.8
million and $44,000 was provided by equipment sales. In the first nine months of
2011, we used $2.0 million to purchase property and equipment and there were no
equipment sales.
We used $135,000 in financing activities in the first nine months of 2012
compared to $303,000 in the first nine months of 2011 to repurchase common
shares from our employees to satisfy tax withholding obligations that arose upon
the vesting of restricted stock awards.
Financing Activities
We have historically financed our operations through a combination of cash on
hand, cash provided from operations, equipment lease financings, available
borrowings under bank lines of credit and both private and public equity
offerings.
Net cash provided by financing activities through September 29, 2012 totaled
$6.6 million, net of $582,000 in expenses. The financing was from two
activities: the registered direct sale of 6,711,219 shares of common stock at
$1.05 per share in February 2012 and at-the-market sales to or through Citadel
Securities of 97,372 shares of common stock at an average price of $1.60 per
share in January and early February 2012. These financing activities were
slightly offset in the first nine months of 2012 by the $135,000 used to
repurchase shares from our employees to satisfy tax withholding obligations
mentioned above.
Contractual Obligations and Commercial Commitments
We have not had any material changes outside of the ordinary course of business
in our contractual obligations as disclosed in our Annual Report on Form 10-K
for 2011.
Capital Expenditures
We plan to invest approximately $1.0 million in fixed assets during the
remainder of 2012. This $1.0 million and the $2.8 million already spent in the
first nine months of 2012 are for the purchase of equipment and facilities
improvements for our HTS wire initiative. There have been no fixed asset
expenditures in the nine months ended September 29, 2012, and we do not plan any
additional fixed asset expenditures in 2012 for our existing wireless business.
Future Liquidity
For the first nine months of 2012, we incurred a net loss of $8.7 million and
had negative cash flows from operations of $7.4 million. In the full 2011 year,
we incurred a net loss of $13.4 million and had negative cash flows from
operations of $10 million. Our independent registered public accounting firm has
included in their audit reports for 2011 and 2010 an explanatory paragraph
expressing substantial doubt about our ability to continue as a going concern.
At September 29, 2012, we had $2.5 million in cash and cash equivalents. We
believe our cash resources will not be sufficient to fund our business for at
least the next twelve months. We will need to raise funds to meet our working
capital needs. Additional financing may not be available on acceptable terms or
at all. If we issue additional equity securities to raise funds, the ownership
percentage of our existing stockholders would be reduced. New investors may
demand rights, preferences or privileges senior to those of existing holders of
common stock. If we cannot raise any needed funds, we might be forced to make
further substantial reductions in our operating expenses, which could adversely
affect our ability to implement our current business plan and ultimately our
viability as a company.
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Net Operating Loss Carryforward
As of December 31, 2011, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $308.4 million and $181.5 million,
respectively, which expire in the years 2012 through 2031. However, during 2011
we concluded that under the Internal Revenue Code change of control limitations,
a maximum of $94.4 million and $70.2 million, respectively, would be available
for reduction of taxable income and reduced both the deferred tax asset and
valuation allowance accordingly. Due to the uncertainty surrounding their
realization, we recorded a full valuation allowance against our net deferred tax
assets. Accordingly, no deferred tax asset has been recorded in the accompanying
condensed consolidated balance sheets.
Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements in conformity with those principles requires
us to make estimates of certain items and judgments as to certain future events
including, for example, those related to bad debts, inventories, recovery of
long-lived assets (including intangible assets), income taxes, warranty
obligations, and contingencies. These determinations, even though inherently
subjective and subject to change, affect the reported amounts of our assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. While we believe that our estimates are based on reasonable
assumptions and judgments at the time they are made, some of our assumptions,
estimates and judgments will inevitably prove to be incorrect. As a result,
actual outcomes will likely differ from our accruals, and those
differences-positive or negative-could be material. Some of our accruals are
subject to adjustment, as we believe appropriate, based on revised estimates and
reconciliation to the actual results when available.
In addition, we identified certain critical accounting policies which affect
certain of our more significant estimates and assumptions used in preparing our
consolidated financial statements in our Annual Report on Form 10-K for 2011. We
have not made any material changes to these policies.
Backlog
Our commercial backlog consists of accepted product purchase orders with
scheduled delivery dates during the next twelve months. We had commercial
backlog of $370,000 at September 29, 2012, compared to $13,000 at December 31,
2011.
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